The China Supreme Court released a judicial interpretation regarding liability for loans gone bad originated on peer to peer lending platforms. The court has stated that while borrowers receive funds via the platforms these intermediaries are not required to guarantee the loans and should not be held liable for bad loans. According to the report in China News, if the platform has appeared to have offered any guarantee they may be forced to take responsibility for the loan. The judicial interpretation is said to take effect beginning September 1st.
The court weighed in on the role of the intermediary and how civil disputes may be handled. Ni Shoubing, Dean of the School of Law at Shanghai University was quoted on the ruling;
“The judicial interpretation makes it clear that online P2P platforms are not financial institutions and are just intermediary parties connecting borrowers and lenders. Some of these platforms may set aside certain risk preparation funds, but the amount is far less than at professional financial institutions, so they don’t actually have the ability to repay lenders when loans go bad.”
Yingdainet COO Luo Lei stated that even with the ruling that investors may still try and sue the platform.
Some industry participants believe it is important to provide 3rd party guarantees to attract business and generate credibility for investors.
Peer to peer lending has grown exponential in China in the past few years. The hockey stick growth has been paired with frequent defaults and dodgy platforms. The Chinese government released additional regulations last month to help address market risk. China has the largest peer to peer lending market in the world.